Are financial analysts eager postmen of bubble psychology? Evidence in the United Kingdom

Abstract

AbstractThis paper examines the investment value of financial analysts' advice (earnings forecasts and stock recommendations) to shareholders around two recent bubble periods in the United Kingdom: the dot‐com bubble period and the credit bubble period. We find that analysts' advice is valuable at the firm level, as reflected in their recommendations for high‐tech stocks before and after the dot‐com bubble burst. However, at the aggregate level, in neither bubble period do we uncover a stable relation between average stock returns and analysts' advice. The key to the lack of predictive power of analysts' advice does not seem to be their predictable nature, as the responsiveness of returns to such news, predicted or not, varies widely around the bubble periods studied.